Commodities

Commodities are raw materials, such as precious metals, agricultural goods, or natural resources, available for sale and purchase. Commodities are traded on global markets and have the following features:

Commodities historically behave differently than financial instruments. Some commodities, such as precious metals or fossil fuels, help investors diversify their portfolios. They will help you spread risk and take profit when other assets underperform.

It makes commodities, particularly precious metals, “safe haven investments” as they protect investors’ wealth against economic downturns and extreme market volatility. For instance, in 2019-2022, the gold price jumped over 40%, while the Russell 2000 and S&P 500 dropped over 30%.

Gold, S&P, and Russell 2000 performance in 2019-2023. Source: TradingView.

More often than not, high commodity prices are harbingers of inflation, while inflation amplifies the increase in commodity prices. This happens due to several mechanisms:

These interconnected factors make commodity prices essential inflation drivers. It also means commodity prices often go hand in hand with inflation, while prices for precious metals often outpace inflation. The cumulative inflation rate in 2019-2023 was ~ 18 – 22% (depending on the source), while the gold price increased 63.7% in the same period, outpacing inflation 2.8 times. The silver price increased 71% in 2019-2023, outpacing inflation 3.2 times.

Let’s take 2019 as a starting point for $1000 and a $1000 gold investment. Due to cumulative inflation, $1000 saved in 2019 has a real value of $835.94 in 2023. Meanwhile, a $1000 gold investment turns into $1598 as of 2023. That’s a 190% difference in real purchasing power.

Commodities are finite natural resources, subject to scarcity and demand dynamics. Due to fixed supply, hard commodities become more valuable with time. According to METGroup research, the world economy will run out of oil and gas in about 50 years. Coal will last for another 100 years. As for crude oil, J.P. Morgan predicts a surge in oil prices driven by increased demand and tight supply as soon as 2025.

Precious metals are also in limited supply, especially gold and silver. David Morgan, Founder and Author of The Morgan Report, estimates that silver supplies will be depleted in the next ten years. Also, scientists predict that global gold mining will be unsustainable by 2050. Surging demand and limited supply will cause gold and silver prices to rise in the future.

It will help commodity investors preserve wealth and capitalize on gains. There are many historical examples, with gold being the most spectacular one. The gold price per ounce has increased by over 9,000% since 1833, with supply-demand dynamics and inflation being the primary value drivers.

You can own physical bullion and store precious metals at home or in dedicated professional depositories. Physical possession provides an unmatched sense of control, typically unavailable with financial instruments. By physically owning precious metals, you get immediate access to your investment, and it’s a preferable choice for 38% of retail investors. Many investors also store precious metals in the form of jewelry, which involves fewer regulatory hurdles.

Commodity investors benefit from insurance coverage against unforeseen events, including disasters and thefts. In most cases, you can recover up to $500,000 worth of your investment. However, with gold investment, you can recover up to $1 billion per account. Here are the key insurance options for commodity investors:

While precious metals are considered safe haven investments, fossil fuels, base metals, and agricultural products are not. They are much more volatile. Standing at the core of the global economy, they are highly prone to supply chain disruptions, supply-demand changes, geopolitical tension, natural disasters, and other risks. These risks cause significant price swings, which may lead to both immense profits and losses for investors, depending on the timing.

When the COVID-19 crisis hit, crude oil dropped from $63 per barrel to -$37.6 per barrel. At that crazy time, you would have to pay $37.6 to sell a barrel of oil. Also, the Brent oil price for future contracts decreased three times in that period. Anyone who bought oil stocks in December 2019 suffered devastating losses.

However, this opened an immense entry opportunity for buyers, who capitalized substantially in 2022 when the Ukraine-Russian war strained global supply chains. In June 2022, crude oil traded at $120 per barrel.

You will not generate passive income if you invest directly in some types of commodities, specifically precious metals. By purchasing gold, silver, platinum, and palladium, you will rely on long-term value appreciation without compound interest typical for stocks and bonds.

However, you can receive dividends with dividend-yielding commodity ETFs and mutual funds. For instance, Invesco DB Agriculture Fund pays 0.44% annually in dividends. You can also purchase shares of companies producing hard and soft commodities. By purchasing commodity stocks and investing in commodities directly, you can drastically reduce your portfolio risks and benefit from the best of two worlds.

Goldman Sachs Physical Gold ETF tracks LBMA Gold Price, a benchmark of physical gold transactions. This ETF doesn’t generate dividends, so investors rely on value appreciation. Goldman Sachs Gold ETF is passively managed and has a net asset value (NAV) of $614 million.

Goldman Sachs Gold ETF delivers a 9.98% annualized return in five years. It is one of the best-performing precious metals ETFs and provides good exposure to gold. It allows investors to benefit from gold value appreciation without managing physical assets.

The Invesco DB Agriculture Fund (DBA) is an ETF with over $830 million in assets under management. It tracks the DBIQ Diversified Agriculture Index Excess Return™. The index holds futures contracts on wheat, red wheat, corn, soybeans, coffee, sugar, cocoa, and cotton. 

This way, the Invesco DBA Fund tacks the major portion of the agricultural sector. It has solid performance (+28% in five years) and pays 0.44% in annual dividends. It’s one of the best ways to invest in agricultural commodities as investors benefit from both value appreciation and compound interest.

The Invesco DB Agriculture Fund (DBA) is an ETF with over $830 million in assets under management. It tracks the DBIQ Diversified Agriculture Index Excess Return™. The index holds futures contracts on wheat, red wheat, corn, soybeans, coffee, sugar, cocoa, and cotton. 

This way, the Invesco DBA Fund tacks the major portion of the agricultural sector. It has solid performance (+28% in five years) and pays 0.44% in annual dividends. It’s one of the best ways to invest in agricultural commodities as investors benefit from both value appreciation and compound interest.

Gold is the leading precious metal. It has been a medium for exchange for centuries. It’s rare, shows unique physical properties, and has high demand. Gold has historically been a hedge against inflation, and its value grows over time. The following factors drive cash for gold rates up and make it a favorable investment:

Silver, often referred to as “the poor man’s gold,” is another precious metal with a rich history of use as a medium of exchange and a store of value. Silver is an excellent conductor of heat and electricity, shows high corrosion resistance and antibacterial properties, and has an aesthetic appeal comparable to gold. Its unique properties, combined with a diverse range of applications, contribute to its consistent demand. Here are some factors that drive the growth of silver prices:

Platinum is 30 times rarer than gold. Platinum is used in many industries thanks to its resilience, conductive properties, corrosion resistance, and biocompatibility. Here are the factors making this precious metal valuable:

That said, platinum carries more risk than gold and silver as it’s much more volatile. Due to scarcity, the platinum market is small and much more dependent on the automotive and industrial sectors affected by regulations and geopolitical tension.

Platinum prices plummeted 6.48% in 2022-2023 due to demand concerns as car makers begin to produce more vehicles that no longer rely on this metal. Volatility, small market, and high dependency on industry performance make platinum a risk diversification investment that may outperform other assets in specific scenarios. However, it is not advisable to hold significant portions of your portfolio in this metal.

Palladium belongs to the platinum group metals (PGM) and shares properties similar to platinum. However, it is rarer than gold and platinum. It’s also estimated that 80% of palladium production goes to the automotive industry for catalytic systems. As a result, palladium prices tend to follow platinum. Here are the factors that drive the palladium prices up:

Still, much like platinum, palladium is highly volatile due to production concentration and high dependency on the automotive industry. South Africa and Russia produce 80% of the global palladium supply, while the automotive industry fulfills 80% of the palladium demand. A major change to the automotive industry or unfavorable events within Russia and South Africa can either boost palladium prices or send them into freefall.

You can purchase commodity stocks, ETFs, and mutual funds on online brokerages. The process is similar to other financial instruments, such as non-commodity stocks, options, futures, or bonds. Follow these steps to buy commodity stocks, ETFs, and mutual funds:

You can invest in precious metals as retirement savings or transfer a portion of your retirement savings to a gold IRA account. For this, you need the following steps:

You can also buy precious metals without a 401k gold IRA rollover or without associating your bullion with retirement accounts. This is the best place to buy gold online. For this, you need to follow these steps: